How to identify trends in Forex trading?
Prices on the stock market often move in certain patterns called trends. A trend is the general direction the market is moving in. In this article we will examine what kinds of market conditions exist and we will discuss the significance of the trend.
Types of market conditions
- Uptrend: the price is moving mainly upwards.
- Downtrend: the price is moving mainly downwards.
- Consolidation: the price is moving mainly between two levels.
There is a struggle between buyers and sellers, there is no clear direction. Buy at the lower levels and sell at the higher levels.
When you start trading Forex, it is important to determine the current market conditions. Is the price moving up, down, or is it moving between two points?
Recognizing a trend
Within an uptrend, ever higher highs and lows created, while a downtrend is characterized by lower highs and lows. Although it sounds obvious, it is important to choose the option with the greatest possibility of succeeding. Therefore you should always buy during an uptrend and sell during a downtrend.
A trend however, is never smooth and never moves in a straight line. The market moves in cycles whereby the general trend is regularly disturbed. Keep in mind that the Forex market is determined by the interaction between buyers and sellers. If the price rises during an uptrend, people will start taking their profits and sell their positions which may lead to a (temporarily) decrease in price.
Thus, a trend always consists of an impulse (the part of the trend that is clearly moving in the right direction) and a retracement (the trend temporarily falls back again). So the price does not continuously move up in an uptrend and neither does it fall uninterrupted in a downtrend.
The retracement is shorter than the impulse. If the retracement is longer than the impulse, and if no new top or bottom is formed in respectively an uptrend or downtrend, there may be a trend reversal. A trend reversal turns an uptrend into a downtrend or vice versa.
Trade professionally along with the trend?
If you want trade professionally it is important to open a position at the time of the bounce and not somewhere halfway the extension. It is important to buy at the cheapest price and sell at the most expensive price. Within an uptrend you should buy at the bottom of the retracement and within a downtrend you should sell at the top of the retracement.
Recognizing possible reversals
By taking into account the fixed pattern of a trend together with extensions and retracements you can foresee a potential reversal. If, during an uptrend, a lower high and a lower low are formed than in the previous cycle, the likelihood of a reversal is quite large. The same applies in a downtrend: if a higher high and a higher low are formed than in the previous cycle, chances are large the downtrend will turn into an uptrend.
The transition of a trend often begins with a consolidation in which both buyers and sellers are unable to create a price breakout. The longer the consolidation, the stronger the eventual upward or downward outbreak will be. When, within the consolidation, the usual pattern of an uptrend or downtrend is broken chances are large a reversal will occur eventually.